Effects of an Operating cycle.

Indicate the effect that the following will have on the operating cycle. Use the letter I to indicate an increase, the letter D for a decrease, and the letter N for no change.

a. Average receivables go up
b. Credit payment time for customers are increased
c. Inventory turnover goes from 3 times to 7 times
d. Payables turnover goes from 6 times to 11 times
e. Receivables turnover goes from 7 to 9 times
f. Payment to suppliers are accelerated

Solution Preview

Indicate the effect that the following will have on the operating cycle. Use the letter I to indicate an increase, the letter D for a decrease, and the letter N for no change.

Operating Cycle (OC) = Average Age of Inventory (AAI) + Average Collection Period (ACP)
Cash Conversion Cycle (CCC) = Average Age of Inventory (AAI) + Average Collection Period (ACP) - Average Payables Period (APP)
Or Cash Conversion Cycle (CCC) = Operating Cycle (OC) - Average Payables Period (APP)
Thus Operating Cycle is affected by Days in Inventory (AAI) and Days in Accounts ...

Solution Summary

The solution discusses the effect on the operating cycle of changes in receivables, credit payment time, inventory turnover, payables turnover, receivables turnover, acceleration of payment to suppliers.

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